9 credit score myths do more harm than good

Dispute everything on your report? Freeze your cards in ice? Hmmm ...

By Teresa Bitler

In today's economy, a good credit score is more valuable
than ever, and for many, improving your score has become a financial priority.
Turn on the radio, flip on the TV or head to the company water cooler and
you'll likely be bombarded with various credit-improving strategies. But not
all advice is good advice. Here are nine credit score myths that could actually
do more harm than good:

1. Closing out old,
inactive accounts will help your score.
Your credit score is based, in part (30 percent) on your utilization rate -- your total
balances versus the total amount of credit available to you. Canceling old accounts reduces the total amount of your available credit, changing that ratio. Any balance will utilize a higher percentage of your credit, which will hurt your score, according to Heather Battison, consumer
education director for TransUnion.

2. Opening (but not
using) accounts will help your score.
To improve their utilization rate and, theoretically, their
credit scores, some people open as many accounts as they can. Rod Griffin,
director of public education for the credit bureau Experian, says this strategy is more likely to
raise eyebrows than your credit score. "Your score is affected by how well you
manage the credit you do have over a period of time, not by how many credit
cards you have or the available balances."

3. You should avoid
using your credit cards at all.
Remember the advice that you should stick your credit cards
in a bowl of water and freeze them, ausing them only for emergencies? If you're a financially responsible
consumer, that approach could negatively impact your credit score. Bruce W.
McClary with ClearPoint Credit Counseling Solutions explains that your score
reflects the responsible use of credit. If you're not using your credit, you're
not building credit history. He advises using your credit from time to time and
then promptly paying off the balance.

4. Dispute letters
can clean up your bad credit.
Errors on your credit report can and should be disputed, but
don't expect
to magically erase accurate but negative credit
history. Disreputable credit repair firms will advise that if you send enough letters disputing
legitimate but negative records on your credit report, eventually the lender
will not be able to respond quickly enough and the credit bureau will have to remove
the item permanently from your credit report. Griffin says that's not the
case. Dispute letters may force the removal of negative items temporarily, but
once the lender can prove the record's accuracy, it will reappear on your
credit report.

5. Paying off old
debts and judgments will help your score.
Have a judgment or an account that went to collections?
Don't expect to make that negative "disappear" by paying it off. Negative
records -- judgments, collections accounts, bankruptcies or late payments -- remain
on your credit report for seven to 10 years, regardless of any remedies you've
made.

6. Credit inquiries
hurt your score.
Inquiries alone have little impact on your score. Coupled
with a history of bad credit, a hard inquiry, such as an inquiry for credit, could
factor negatively into your score, but again, the effect would be minimal.
Another myth? Pulling your own credit report, a soft inquiry, lowers your
score. In fact, checking your credit report on a regular basis allows you to
catch errors that could affect your score and identify those areas that need
improvement.

7. Using a credit
counseling service lowers your score.
Credit counseling services no longer figure into the FICO
scoring system, so although your report might indicate you are receiving credit counseling, using those services won't lower your score. It could actually help
your score, according to Todd Christensen, director of education at Debt
Reduction Services Inc. "You're making your payments on time and paying down
your debt, the top two factors in credit scoring," he says.

8. There's a set
formula for obtaining good credit.
Be suspicious of any blanket statement about what people
should or shouldn't be doing to improve their credit scores. "Credit is a very
individual thing," says Griffin. "Credit scoring looks at everything and takes
it all into account. If you are keeping your balances low and paying your bills
on time, you'll have good credit and a good credit score."

9. You can get a
perfect score.
Don't go to Herculean efforts trying to obtain that elusive
850 -- getting a perfect credit score is nearly impossible. Your credit score is a reflection of your credit
risk, and regardless of your credit history, there's always a risk. Doug Minor,
author of "Anatomy of Credit Scores," recommends working toward a score of at
least 740. "It's more realistic and attainable than 850," he says.

Published: September 15, 2010

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